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I see this sort of listing all too often for multi-family apartment complexes:

  • Excellent Investment Opportunity! 12-Unit Residential Building.
  • $2,100,000 list price
  • $284,000 yearly rental income
  • $79,000 yearly expenses
  • $205,000 net income
  • $190,000 income after debt

I just seem very speculative of these claims. Why on earth would someone sell something that makes them $100k+ every year? Why are they trying to get rid of it?

The listings all come from legitimate Canadian realty sites such as CIR, REMAX, etc.

Are they actually making 190k cash after all deductions?

  • $284,000/12mo = $23,667/ mo. / 12 units = 1972.22/$ mo. rent / unit. Rents must be high in this area :) – Ross Aug 17 '16 at 18:36
  • Consider - even if they are telling the truth, what "truth" are they telling? "79k in yearly expenses" Based on last year, an average, or projections? Does it include all cash outflows, or just the ones they are considering as "expenses"? [maybe for these purposes, maybe for a tax return, maybe for some financial statements] ie: Do they anticipate putting $200k into the property next year for major replacements they would consider "capital", such as roofing etc? Would they let you see their tax returns to prove these amounts out, or audited financial statements? What is their occupancy %? etc. – Grade 'Eh' Bacon Aug 17 '16 at 18:43
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The bottom line it is an advertisement. Some things will be true [Ex. 12 Unit apartment, listing price]. Some will be opinion: [Ex. Excellent Investment opportunity]. Some will be stretching the truth: [Ex. 190K after debt, expenses].

A good rule of thumb, in rental real estate is to count on half of potential rental income. This will cover unknowns such as vacancies and repairs; and, knowns such as taxes and common area cleaning. As such, you have a return of about 6% if you were able to pay cash (142K/2100K). That is good, but not great. Your ROI would be a lot less if you had a loan.

Its likely that clearing 190K/year is only possible if you manage the property yourself and have no vacancies or repairs. This would include cleaning the common areas. That is a lot of work and you have to be lucky. Never mind the fact you have to qualify to borrow 2.1 million. This will probably be on top of a loan on your family home.

So if you had 2.1 million, you could live quite comfortably on the income off of this investment. If you had no other significant investments you would not be diversified.

If you could borrow 2.1 million, you could probably break even or better and in 20 to 30 years have an investment that could provide you with a nice living. You could accelerate the time frame by doing much of the work yourself or even living in the property.

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  • "You have to qualify to borrow the 2.1M" Not only that, but what rate are you going to get 2.1M at? If the seller has a better financial position than you, the banks may have offered them a lower interest rate due to reduced risk, compared with what you will get. – Grade 'Eh' Bacon Aug 17 '16 at 18:39

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